Liquidity Constraints, Household Wealth and Entrepreneurship
The George Washington University School of Business; National Bureau of Economic Research (NBER)
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Dartmouth College Working Paper No. 2003
Using data from the Panel Study of Income Dynamics (PSID), we show that the propensity to become a business owner in the United States is a non-linear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distribution - after the 95th percentile - that a positive relationship can be found. Segmenting businesses into industries with high and low starting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. We exploit the regional variation in house prices as an instrument for liquidity. Households who lived in regions where housing prices appreciated strongly were no more likely to start a business than households in other regions. We conclude that, while liquidity constraints may be important for some households, they are not a deterrent to the majority of small business formation in the United States.
Number of Pages in PDF File: 37
Keywords: Business formation, wealthy households, starting capital
JEL Classification: E21, D91working papers series
Date posted: July 17, 2003
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